A Breakout Would Be Just the Start

 | Dec 12, 2011 | 6:37 AM EST  | Comments
  • Comment
  • Print Print
  • Print
Stock quotes in this article:

TLT

Given that I am the self-appointed queen of head-and-shoulders patterns, it will not surprise you that my inbox was filled this weekend with questions on the potential head-and-shoulders bottom in the S&P 500. Of course, in recent days I have been focusing more on the potential head-and-shoulders top in bond yields via iShares Barclays 20+ Year Treasury Bond Fund (TLT), rather than the bottom in the S&P. As we know, these tend to move in inverse fashion to one another.

First, for those of you who don't see the head-and-shoulders bottom in the S&P, see the chart below, with the annotations in red. I've left in the black line -- the lower line of the November triangle pattern -- so you can see how it has acted as resistance on this recent rally. The line is rising, meaning the resistance level is climbing with time -- and, as you can see, it should continue to act as resistance for at least a bit more time.

S&P 500

But I care about the underlying statistics in addition to the patterns, so I will carefully monitor these numbers on any move over the neckline. Before I note that data, I'll also mention that there are in fact three things converging right here at the same time: the 200-day moving average line, previous rally highs or resistance and the neckline of a head-and-shoulders bottom. As such, a move that has the S&P crossing upward, and out of this area, should not be dismissed.

As far as statistics go, though, the number of new highs on the NYSE will have to improve. The peak reading, in late October, was 174. Last week we saw 120. Friday the reading was a pathetic 84. Should the market break out, I expect the number to move upward, just based on the hundreds of stock charts I have looked at. But will there be enough to get above 175? That remains a question in my mind.

Stocks Making New Highs -- NYSE

The NYSE cumulative advance-decline line has not led the advance; rather, it has essentially kept pace. But this, too, will need to make a higher high if the S&P is to break out and sustain the move. I believe this should easily confirm a breakout. In fact, I would be surprised if it did not.

NYSE Cumulative Advance-Decline Line

I am more concerned about the Nasdaq's cumulative volume, which has been a laggard thus far. This indicator needs to improve, and quickly!

Nasdaq Cumulative Volume

Here is the chart of TLT, which I have shown here several times in the last week, with that potential head-and-shoulders top. If equities are to break out and sustain the breakout then I believe TLT will need to breakdown and sustain such a move.

iShares Barclays 20+ Year Treasury Bond Fund (TLT)

So a breakout above the neckline would be terrific, but only if it's accompanied by an improvement in new highs, a confirmation of breadth and a breakdown in TLT. Oh, there are some other statistics that would need improving, as well, but those three would be a great place to start.


Overbought/Oversold Oscillator -- NYSE

Overbought/Oversold Oscillator -- Nasdaq

Columnist Conversations

GS has cleared the important hurdle on the way up which increases the odds for an eventual rally towards the 1...
A good quarterly report has sent shares of Calamos Asset Management (CLMS) sharply higher. CLMS was up about ...
Electronics distributor Ingram Micro (IM) reported better than 16% growth in its Q3 sending the stock up about...

BEST IDEAS

REAL MONEY'S BEST IDEAS

Columnist Tweets

BROKERAGE PARTNERS

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data provided by Interactive Data. Company fundamental data provided by Morningstar. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by Interactive Data Managed Solutions.


TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

IDC calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.